Econ Professor: If spending on arenas benefits the economy, why not spend twice as much?

Another piece of what city officials, media voices and some others have characterized as a Detroit comeback story moved forward on July 11 when the NBA officially began its approval process for the Pistons’ return to the city after a 40-year hiatus.

The Pistons organization and government officials in Detroit are praising positive claims made about the economic impact the move will have on Detroit. But one economics professor at the University of Michigan-Flint cautions that there are reasons to be skeptical.

Christopher Douglas, the chair of the Department of Economics at the University of Michigan-Flint, says the economic impact of the move has been greatly overstated.

The move announced last November includes modifications to Little Caesars Arena as well as the construction of a new practice facility in the New Center area of Detroit. It was sold to the city with the promise of creating approximately 2,164 jobs and $216.1 million in economic benefits.

The job and economic impact numbers come from a University of Michigan economic impact study commissioned by Palace Sports and Entertainment (which owns the Pistons).

The combination of jobs and so-called community benefits was enough for the Detroit City Council, which approved borrowing $34.5 million to subsidize modifications to Little Caesars Arena in a 7-2 vote on June 20.

The Pistons’ previous home of 29 years, The Palace of Auburn Hills, was built completely with private funds. The Palace did receive a property tax abatement from the city of Auburn Hills from 1985 to 1999.

Douglas critiqued the study for its assertion that the move would generate $216.1 million in direct and indirect economic impact.

More than half of the $216.1 million results from the estimated cost of construction labor and materials. The study calls this new economic impact because the construction would not have occurred without the move. Douglas said the money spent on construction should be described as a cost.

“If the money spent on labor and materials was a benefit, then we could double the benefit of the expansion by doubling the construction cost,” Douglas said. “Making the construction as inefficient as possible would increase the economic benefit.”

The study also estimates that the move will result in an economic impact of $290 million in Detroit which would otherwise occur in Auburn Hills.

According to documents from the Detroit Downtown Development Authority, the ownership group for the team has promised to ensure that 25 percent of jobs after construction are available to city residents.

The study also claims 422 permanent jobs will be created in Detroit as a result of the move. According to the study, this number includes jobs which were “relocated and therefore, ‘recreated’ to contribute to the creation of new taxes for Detroit.”

Douglas critiqued the assertions related to the impact of relocating economic activity as well.

“The economic impact of relocating front office employees from Auburn Hills to Detroit is minimal if these employees don't move to Detroit as a result,” he said. “They may buy coffee and lunch in Detroit, but the majority of their spending patterns will remain unchanged.”

The city also plans to gain revenue from the 1.2 percent (non-resident) to 2.4 percent (resident) city income tax levied on members of the Pistons’ staff, players and coaches.

According to USA Today Sports, the team payroll will be $97.4 million this season. Assuming all of the players lived outside of Detroit, the city would extract about $1.2 million in income taxes from players over the course of the season. That number doesn’t include team staff and coaches.

The city also expects to charge visiting players, coaches, and entertainers a “jock tax” on the income they earn with Little Caesars Arena. According to estimates by the Pistons cited by The Detroit News, this will result in $4 million in revenue for the city.

Douglas, who is on the board of scholars at the Mackinac Center for Public Policy, is skeptical about how effectively the jock tax will be levied.

“The so-called ‘jock tax,’ which is income taxes paid by home and visiting players, is notoriously difficult to estimate and collect,” he said.

Mark Rosentraub, a professor of sports management at the University of Michigan-Ann Arbor, is the main author of the study. He has studied the economic impact of numerous public-private stadium projects and worked with Olympia Entertainment on the economic impacts of Little Caesars Arena.

On his personal website, Rosentraub said he didn’t always believe in using taxpayer funding for sports stadiums, but changed his mind when he saw how they could generate tax revenue for cities.

“So, how does a city attract or deflect regional economic activity back into its taxing borders? What activity attracts a large number of visitors each and every year and is also an activity that suburban cities cannot duplicate or also offer? The answer to that question is professional sports,” he said.

Rosentraub did not respond to a request for comment on this story.

Palace Sports and Entertainment did not return a request for comment on this story.

A representative of Olympia Development of Michigan, which will operate Little Caesars Arena along with the team, directed Michigan Capitol Confidential to its District Detroit website, which claims the district (which includes the stadium) will ultimately have an economic impact of over $2 billion and create 1,100 permanent jobs.

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